Market infrastructure - South Korea

30.05.2016

Institutions and organisation

Korea Exchange - KRX

The Korea Exchange (KRX) was launched on 27 January 2005 and was created through the integration of the Korea Stock Exchange (KSE), Korea Securities Dealers Association Automated Quotation trading board (KOSDAQ) and the the Korea Futures Exchange (KOFEX). KRX is the operator of Korea’s securities and derivatives markets under the ‘Financial Investment Services and Capital Markets Act' (FSCMA).

The KRX is a self-regulating organisation supervised by the Ministry of Finance and Economy (MOFE) and the Financial Supervisory Commission (FSC), see “Regulatory structure” below.

The KRX is responsible for:

  • Maintaining a fair and orderly market;
  • Regulating and supervising member firms;
  • Setting listing requirements;
  • Monitoring securities;
  • Enhancing activities approved by the MOFE;
  • Regulating corporate disclosure.

The KRX monitors the trading activities to prevent price manipulation, insider trading and other acts of malpractice. If anything suspicious is detected, the KRX may conduct in-depth investigations and order the member firm in question to submit any documents or material required. The exchange may exercise a range of disciplinary actions depending on the severity of the case including warning, suspensions or cancellations of the membership.

Trades on the KRX are executed by its member securities firms.

The South Korea market is a typical order-driven market, where buy and sell orders compete for best prices without a specific market maker. Bids and offers received from many and unspecified traders are executed according to established auction principles.

The full trading procedure, from order placing and receiving, order matching and execution, through to trade confirmation, is fully automated. This ensures that all orders are processed accurately and without delay. After an order has been executed, the KRX member that submitted the order validates the details (issue, quantity and price) of the executed order and confirms that the details match the input order. If no error is found, the member determines the amounts of the payment and of the securities to be collected on the settlement date according to the confirmed details.

Korea Securities Depository (KSD)

The KSD was established in 1974 as the central depository for South Korea and the clearing and transfer agent for listed companies. Securities companies and other financial intermediaries are required to open accounts and deposit their securities with the KSD.

The KSD is also the paying agent for income and is authorised to exercise voting rights according to instructions from beneficial owners.

The KSD is owned by the KRX and 59 financial institutions. There are over 3,300 KSD participants that include securities firms, banks, insurance companies, pension funds, investment trust companies and other corporations.

It is mandatory to settle all trades effected on the KRX through the KSD. The KSD runs a book-entry system called Institutional Settlement (InSet) System and all transactions are cleared on a net basis through the participants' clearing accounts with the KSD.

More than 80% of shares and bonds are dematerialised within the KSD. All foreign investors are required to hold their securities in safekeeping with the KSD by regulation.

Institutional Settlement System (InSet)

InSet is administered by the KSD and operates a book-entry clearing system for securities listed on the KRX and as well as those traded via the KOSDAQ. This system involves the electronic transfer of securities.

Bilateral netting of cash and securities

On settlement date, the KSD executes bilateral netting of cash and securities for each participant. The net settlement figures are available on the participants' in-house KSD terminal.

Cash settlement

Cash settlement is on a bilateral basis.

Participants in a net buying position wire the cash, in Korean Won (KRW), to the KSD's settlement account at the Bank of Korea (BOK) via the BOK payment system, the Bank of Korea Financial Wire Network (BOK-Wire).

Securities clearing and settlement

The KSD effects securities transfers upon confirmation of the participant's net-due funding in its settlement account on settlement date.

Securities are kept in dematerialised (commingled) form.

Foreign investors are required to deposit all KSD-eligible securities in the KSD.

All on-exchange trades between brokers are cleared on a net basis via the KSD participants. Settlement of transactions between custodian banks and brokers occurs via book-entry on a “cross basis” (that is, without netting) in the KSD.

KSD-eligible instruments

  • Securities listed on the KRX;
  • Non-listed bonds issued in a series of listed bonds but with different date of sales;
  • Short-term instruments for example, Commercial Papers, Certificate of Deposits:
  • Government bonds and bonds whose issuers designate either the KSD or the BOK as a registrar;
  • Shares and warrants issued by the rights exercising of the deposited shares;
  • Other securities, as deemed appropriate by the KSD.

Shares held in the KSD are registered in the name of the KSD as nominee.

Central bank - the Bank of Korea (BOK)

The BOK was established on 12 June 1950 under the Bank of Korea Act. Its main purpose is the pursuit of price stability. In addition, it performs the typical functions of a central bank: issuing bank notes and coins, formulating and implementing monetary and credit policy, serving as the bankers’ bank and as the government’s bank. The BOK also operates the payment and settlement systems, manages the foreign exchange reserves and exercises certain bank supervisory functions.

Regulatory structure

The securities market in Korea is supervised by the MOSF and the FSS.

Ministry of Strategy and Finance (MOSF)

The MOSF controls and directs the Korean securities market by setting overall policy. It is primarily responsible for the interpretation of securities laws and authorisation and revocation of licences for financial institutions.

Financial Services Commission (FSC)

The FSC, established in 1999, is responsible for the implementation and amendment of supervisory rules and the inspection and examination of financial institutions. The FSC is a consolidated regulator for the securities, banking and insurance industries. Although nominally under the jurisdiction of the Prime Minister, the FSC performs its duties independently of the Prime Minister and other government departments.

The Financial Supervisory Service (FSS)

The FSS, established in January 1999, it is the executive arm of the FSC. The FSS' main objectives are to ensure sound and fair trading practices in the Korean financial markets. It is also responsible for granting Investor Registration Certificates.